Practice Problems 1

Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state? A. Limited partnership B. Joint venture C. Limited liability company D. Subchapter S corporation

B. Joint venture A joint venture is an association to accomplish a specific business purpose. It is easily formed and is often organized for a single transaction. No statute requires a filing to create a joint venture.

During the process of assisting a client to choose a business entity, the best course of action for a tax professional is to A.Affirm a client's preconceived expectations for the best entity selection. B.Apply professional judgment to an analysis of the client's situation and overall objectives. C.Treat all clients the same. D.Ignore the client's goals.

B.Apply professional judgment to an analysis of the client's situation and overall objectives. The process of identifying clients' objectives for the purposes of advising on the choice of entity is less a matter of asking clients direct questions on their tax savings desires and liability objectives and more a matter of applying professional judgment to an analysis of their situation and overall objectives.

A partner's share of income, gains, losses, deductions, or credits is usually determined by the partnership agreement. (t/f)

False - Partnerships include organizations that carry on a business, financial operation, or venture with a profit motive. A joint undertaking merely to share expenses is not a partnership [Reg. 301.7701-1(a)]. Mr. Diaz and Mr. Garcia do not have a partnership for federal income tax purposes.

S corporation can have multiple classes of stock, but are limited to 100 shareholders.

False - S corporations may have only one class of stock and the number of shareholders is limited to 100.

In general, a multiple-member LLC may be taxed as a partnership or corporation.

True - Multiple-member LLCs may choose to be taxed as partnerships or corporations. Thus, an LLC has the advantage of being a pass-through entity or a taxable entity at the discretion of the member(s).

Which of the following statements regarding a limited partner is (are) usually true? I The limited partner is subject to personal liability for partnership debts. II The limited partner has the right to take part in the day-to-day management of the partnership.

Neither I or II A limited partner's liability for partnership obligations is limited to his or her capital contribution of the business, whereas a general partners has unlimited personal liability for partnership debts. The limited partner is also restricted in the right to control the partnership, he or she is not allowed to participate in the day-to-day management of the partnership business.

Which of the following is a legal entity separate from its owners? A. Limited partnership B. LLP C. LLC D. All of the answers are correct

D. All of the answers are correct Limited partnerships, LLPs, and LLC are all legally separate from their owners. Such an entity may enter into contracts, sue, be sued, and own property in its own name.

Which of the following may not own shares in an S corporation? A. Individuals B. Estates C. Qualified trusts D. Corporations

D. Corporations Shareholders are limited to individuals, estates, qualified trusts, banks, and certain tax-exempt entities (e.g., certain charities with qualified pension plans). A C corporation, an entity subject to the federal corporate income tax, may not own shares in an S corporation.

The partnership agreement for Own Associates, a general partnership, provided that profits be paid to the partners in the ration of their financial contribution to the partnership. Moore contributed $10,000, Noon contributed $30,000, and Kale contributed $50,000. For the year ended December 31, Owen had losses of $180,000. What amount of the losses should be allocated to Kale?

$100,000 The partnership agreement specifies that profits are to be allocated based on financial contributions. The RUPA provides that, unless otherwise agreed, losses are allocated in the same manner as profits. Hence. Kale will be allocated loses of $100,000 ($180,000 x ($50,000 / ($10,000 + $30,000 + $50,000))).

Dowling is a promoter and has decided to use a limited partnership for conducting a securities investment venture. Which of the following is unnecessary to form the partnership. A. All limited partners' capital contributions must be paid in noncash services to the limited partnership. B. The state statute must recognize limited partnerships. C. The limited partnership certificate must be signed by the participants and filed in the proper office in the state. D. The partnership must have one or more general partners and one or more limited partners.

A. All limited partners' capital contributions must be paid in noncash services to the limited partnership. The capital contribution of a limited partner may be paid in cash or property. A limited partners may not provide services to the limited partnership.

All of the following businesses, formed after 1996, are automatically classified as corporations except A. An insurance company. B. A partnership that possesses at least three of the following characteristics: limited liability, centralized management, free transferability of interest, and continuity of life. C. Certain foreign businesses. D. A business wholly owned by a state or local government.

A. An insurance company. After 1996, the corporate characteristics are not determinative of corporate status. Only certain entities are required to be corporations. Other entities, such as limited liability companies, can choose partnership taxation even though the entity may possess all four of the corporate characteristics of (1) continuity of life, (2) centralization of management, (3) limited liability, and (4) free transferability of interests. Answer (A) is incorrect because insurance companies must be taxed as corporations if they are formed after 1996.

Which of the following is a requirement for a small business corporation to elect S corporation status? A. It has only one class of stock. B. It has at least one partnership as a shareholder. C. It has international ownership. D. It has more than 75 shareholders.

A. It has only one class of stock. To elect S corporation status, a company must have only one class of stock, which must be common. Among the other corporation requirements are that the number of shareholders be limited to 100 and that the corporation be incorporated in the U.S.

Which of the following is false regarding the taxation of a sole proprietorship? A. Sole proprietorships are subject to tax at both the business and individual level. B. All business deductions and losses are reported on the proprietor's tax return. C. Income of the business must be reported by the proprietor. D. The sole proprietorship only requires the filing of one return.

A. Sole proprietorships are subject to tax at both the business and individual level. The proprietor and proprietorship are not distinct entities. A.. business income and loss is reported by the proprietor on his or her return. As a result, two major tax advantages of the sole proprietor are the need to file only one return and the avoidance of double taxation of corporate earnings paid as dividends.

Which of the following is not a client objective in the decision of which entity to use? A.The client needs to determine whether to produce or purchase a product. B.The client want to be the sole decisions maker. C.The client wants the business to continue after her death. D.The client want to be able to involve his family in ownership of the business.

A.The client needs to determine whether to produce or purchase a product. The make or buy decision is a cost accounting decision irrelevant to entity selection.

When planning with a client for the choice of entity, what step(s) should the tax professional take? A. Have a lawyer draft articles of incorporation before meeting with the client. B. Identify the client's goals and develop and coordinate a strategy to fulfill those goals. C. Recommend an entity based on financial information. D. Provide assurance that the correct business entity selection will ensure the business' success.

B- Identify the client's goals and develop and coordinate a strategy to fulfill those goals. All choice-of-entity planning engagements should include two basic steps: • Identifying the client's goals and • Developing and coordinating a strategy to fulfill those goals

In a general partnership, which of he following acts must be approved by all the partners? A. Purchase of inventory. B. Admission of a transferee as a partner. C. Authorization of a partnership capital expenditure. D. Conveyance of real property owned by the partnership.

B. Admission of a transferee as a partner. The right to choose associates means that no partner may be forced to accept any person as a partner. The Revised Uniform Partnership Act states, "A person may become a partner only with the consent of all the partners." When a partner transfers his or her interest to another, the purchaser of other transferee is entitled only to receive the share of profits and losses and the right to distributions allocated to the interests he or she has acquired. A transferee can, however, become a partner with the consent of all partners.

KLM, a domestic limited liability company (LLC), is formed in March of the current year. The entity has two members and does not disregard its default classification for tax purposes. What is the default classification of KLM for tax purposes? A. Association taxed as a corporation. B. Partnership. C. Limited liability company. D. Sole proprietorship.

B. Partnership The classification of an entity under the check-the-box regulations. DISCUSSION: The check-the-box regulations adopt a default for domestic entities other than corporations, under which a newly formed LLC (or other eligible entity) is classified as a partnership if it has at least two members. The classification is automatic and is granted without any action on the part of the LLC. However, an election can be made to have the entity treated as an association and, accordingly, taxed as a corporation. Electing to be taxed as an association, the entity may be able to choose to be treated as either an S corporation or a C corporation. For foreign entities, the determination is more complex.

All of the following entities may experience conflict between managers and/or owners except A. General partnerships B. Sole proprietorships C. Limited liability partnerships D. Corporations

B. Sole proprietorships Sole proprietorships are the most basic and (usually) simplest form of business organization. One advantage of this entity is that the owner manages the business and reports to no one. For this reason, there is no conflict between the manager/owner.

by default, a partnership has which of the following characteristics? Limited Life and Federal income tax

Both A partnership is an association of two or more persons to carry on a business as co-owners for profit. For federal income tax purposes, it is a pass-through entity. Thus, partnership income (loss) is reported on the owners' tax returns, but the partnership itself does not pay taxes. Moreover, one of the distinguishing characteristics of the partnership form of business is its lack of continuity of life.

Which of the following is true regarding the taxation of limited partnerships? A. The limited partnership need not file a return. B. Double taxation applies to limited partnerships. C. The IRS is not concerned whether a limited partnership is in substance a corporation. D. The limited partnership is a pass-through (nontaxable) entity.

D. The limited partnership is a pass-through (nontaxable) entity. Like the general partnership, the limited partnership is a pass-through (nontaxable) entity. Hence, the partners report their shares of the limited partnership's taxable and deductible items on their personal returns.

General partnerships limit each partner's personal liability for all losses and debts of the business. (t/f)

F- General partners are exposed to unlimited liability. General partnership expose owners to liability risk because the owners may be liable for their partners' acts.

Sole proprietorships and partnerships can be transferred.

False - Sole proprietorships cannot be transferred. If the business is sold, the owners reports the sale as if each asset were sold. Partners can transfer their ownership interests in the partnership to other individuals or entities.

A disadvantage of an LLC is there can only be one class of stock.

False - The advantages of limited liability and avoidance of double taxation may attract member-investors. LLCs may also have different classes of ownership (i.e., more than one class of stock).

A limited liability partnership (LLP) A. Starts life as a corporation. B. Is typically adopted by providers of professional services C. Is ordinarily treated as a legal entity to the same extent as a corporation. D. Only offers a liability shield for professional malpractice, not for other partnership debts.

B. Is typically adopted by providers of professional services An LLP is a general partnership that has been changed to LLP status in accordance with state law. The LLP is a business structure that is often adopted by providers of professional services (e.g., attorneys, CPAs, and physicians) and family enterprises.

In the absence of a member agreement, in general, how are profits and losses shared by members of a limited liability company in a state that has enacted the Unform Limited Liability Company Act? A. In proportion to hours worked. B. Shared equally. C. In proportion to voting power. D. In proportion to their revenue generated.

B. Shared equally Profits and losses are generally shared equally in an LLC formed under the ULLCA.

A corporation has perpetual existence unless the articles provide for a shorter life, or it is dissolved by the state or its owners.

True - A corporation has perpetual existence unless the articles provide for a shorter life, or it is dissolved by the state. Death, withdrawal, or addition of an individual shareholder, director, or officers does not end its existence.

A joint venture is treated as a partnership in most legal cases. (t/f)

True - A joint venture is treated as a partnership in most legal cases.

Bob decides to start a bicycle repair shop. He is the sole proprietor and raises additional capital by borrowing from a local bank. Which of the following may become a risk if Bob defaults on the repayment of the loan? Assets of the bicycle repair shop Bob's equity capital invested Bob's personal assets

All 3 Proprietors face unlimited personal liability for all losses and debts. All of Bob's assets related to the bicycle repair shop and even his personal assets may become at risk. Depending on the extent of the defaulting loan, the bank may claim rights against all of Bob's assets.

All of the following are available tax classifications for a two-member entity under the check-the-box regulations except A. Association taxed as a C corporation. B. An entity disregarded as a separate entity from the taxpayers. C. Association taxed as an S corporation. D. Partnership.

B. An entity disregarded as a separate entity from the taxpayers. For an entity with more than one member formed after the institution of the check-the-box regulations, the default classification is for the entity to be taxed as a partnership. However, an election can be made by the eligible entity to be treated as an association taxed as a corporation. Electing to be taxed as an association, the entity may be able to choose its treatment as either an S corporation or a C corporation. To be an S corporation, it must make an S election, plus the election under the check-the-box regulations to be treated as an association. For a two-member entity, an election to be disregarded as a separate entity from the taxpayer (i.e., a sole proprietorship) is not available.

Which of the following statements is false with respect to partnership agreements? A. Modifications to the partnership agreement must be agreed to by all the partners or adopted in any other manner provided by the partnership agreement. B. The partnership agreement or modifications can be oral or written. C. The partnership agreement can be modified for a particular tax year after the close of the year, but not later than the date for filing the partnership return for that year, including extensions. D. A partner's share of income, gains, losses, deductions, or credits is usually determined by the partnership agreement.

C. The partnership agreement can be modified for a particular tax year after the close of the year, but not later than the date for filing the partnership return for that year, including extensions. A partnership agreement may be modified with respect to a particular tax year after the close of the year, but not later than the date for filing the partnership return for that year, not including any extensions [Reg. 1.761-1(c)].

Which of the following organizations formed after 1996 cannot be classified as a partnership? A. An insurance company. B. A tax-exempt organization. C. A real estate investment trust. D. All of the answers are correct.

D. All of the answers are correct. A partnership is defined under Sec. 761(a) as including a syndicate, group, pool, jointventure, or other unincorporated organization that carries on a business and is not a corporation, a trust, or an estate. Partnerships include organizations that carry on a business, financial operation, or venture with a profit motive. Also, under Reg. 301.7701-2(b), an insurance company is a corporation.

The owners of an LLC who participate in management have limited liability. (t/f)

True - Like the shareholders of a corporation, but unlike the partner-managers of a limited partnership, the owners of an LLC who participate in management have limited liability.

Certain investing or operating agreement partnerships may be completely excluded from being treated as a partnership for federal income tax purposes. All of the members must choose to be excluded and the partnership has to file a partnership return, Form 1065, by the due date of the return, including extensions, for the first year it wishes to be excluded. (t/f)

True - Sec. 761(a) allows a partnership which is essentially an operating agreement or that exists for investment purposes only and not for the active conduct of a business to be excluded from treatment as a partnership (under Subchapter K only) if all of the members so elect. Each member must separately include his/her share of the income and deductions.

Subchapter K rules apply both to general partnerships and to limited partnerships.

True - Subchapter K is the part of the Code containing most of the tax rules that apply topartnerships. A partnership is defined under Sec. 761(a) as including a syndicate, group, pool, joint venture, or other unincorporated organization which carries on a business and is not a corporation, trust, or estate. Both limited and general partnerships fall within this definition.

A corporation, for federal income tax purposes, includes associations, joint stock companies, and insurance companies. (t/f)

True - The term "corporation" under federal tax law includes associations, joint stock companies, and life insurance companies [Sec. 7701(a)(3)].

What type of business organization may generally be formed without filing an organizational document or certificate with a state government agency or office?

A general partnership An advantage of the general partnership is that it can be created without any formalities. No filings are required, and the existence of the partnership may arise from a written or oral agreement.

For federal income tax purposes, a partnership, other than a publicly traded partnership, is A. Required to pay a tax upon its profits which in turn must be assumed by its partners. B. Considered to be a nontaxable entity but which must file an information return. C. A taxable entity similar to a trust or estate. D. Treated the same as an association for tax purposes.

B. Considered to be a nontaxable entity but which must file an information return. Sec. 701 states that the partners, not the partnership, are subject to federal income tax.The partnership is required to file an information return (Form 1065) under Sec. 6031. For the purpose of reporting income, a partnership is a conduit which distributes the income to the partners.

If no provisions are made in an agreement, a general partnership allocates profits and losses A. Based on revenues generated by each partner. B. Equally among the partners C. By the number of hours each partner worked in the partnership during the year. D. By the number of years each partner belonged to the partnership. Clear my choice

B. Equally among the partners To the extent the partnership agreement allocated partnership profits and losses among partners, it governs. Absent agreement, each partner is entitled to an equal share of profits and must contribute toward losses tin the same proportion he or she is entitled to share in profits.

A group of six individuals organizes an LLC to conduct a software publishing business in Florida. No individual is specifically authorized to make the election. What individual(s) is (are) required to make the election? A. President B. Every member of the entity C. Any officer D. Any manager or officer

B. Every member of the entity An eligible entity may elect its classification on Form 8832. The election must be signed by every member of the entity, or any officer, manager, or member of the entity who is authorized to make the election. Since no member is authorized to make the election, every member must sign the election for it to be effective. The election must include all required information and the entity's taxpayer identification number. A copy of Form 8832 must be attached to the entity's tax return for the election year.

A general partnership must A. Pay federal income tax. B. Have two or more partners. C. Have written articles of partnership. D. Provide for apportionment of liability for partnership debts.

B. Have two or more partners. A partnership is an association of two or more persons conducting a business that they co-own for profit. Absent association by agreement of at least two person as partners, there is no partnership.

The owners of a limited liability company (LLC) are known as which of the following? A. Partners B. Members C. Stockholders D. Shareholders

B. Members An LLC combines the limited liability of the corporation with the tax advantages of the general partnership. Like a corporation, a limited partnership, and an LLP, an LLC is a legal entity separate from its owner-investors (called members) that can be created only under the state law.

The formation of a sole proprietorship A. Requires registration with the federal government's Small Business Administration. B. Requires a formal "doing business as" filing under state law if the proprietor will be conducting business under a fictitious name. C. Requires formal registration in each state the proprietor plans to do business in. D. Is not as easy and inexpensive to form as an S corporation. Clear my choice

B. Requires a formal "doing business as" filing under state law if the proprietor will be conducting business under a fictitious name. A proprietor doing business under a fictitious name is usually required to make a d/b/a or "doing business as" filing under state law. On the other hand, the formation of a sole proprietorship is subject to only a few legal requirements, such as local zoning and licensing. In this respect, the sole proprietorship is the easiest and least expensive to create of all the business organizations.

Which of the following statements is true regarding sole proprietorships? A. Equity capital from outside sources can be easily raised. B. The proprietor must make management decisions in accordance with rules set by the Small Business Administration. C. A sole proprietorship located and registered in Florida may also conduct operations in Nevada and Michigan without having to formally register in those states. D. An advantage of the sole proprietorship is its ability to exist even after the proprietor dies.

C. A sole proprietorship located and registered in Florida may also conduct operations in Nevada and Michigan without having to formally register in those states. An advantage of the sold proprietorship is its ability to de business in any state without have to file, registrar, or otherwise qualify to do business in that state. Another advantage is the proprietor's power to make all management decisions without answering to other executives, directors, or owners. However, two major weaknesses of the sole proprietorship are the difficulty in raising equity capital and the lack of continuity of existence.

At the entity level, what entity has the fewest restrictions on fringe benefits that are tax-exempt to the owner and deductible by the entity? A. Proprietorship B. S corporation C. C corporation D. Limited partnership

C. C corporation Employee fringe benefits, such as accident and health insurance, are fully deductible by a C corporation and nontaxable to the owner-employee. Generally, fringe benefits paid on behalf of a partner, an S corporation shareholder, or a sole proprietor are not tax deductible.

For federal income tax purposes, all of the following statements regarding partnerships are true except A. The term partnership includes a syndicate, group, pool, joint venture, or other unincorporated organization that is carrying on a business and that may not be classified as a trust, estate, or corporation. B. A partnership is the relationship between two or more persons who join together to carry on a trade or business. C. Co-ownership of property that is maintained and leased or rented is considered a partnership if the co-owners provide no services to the tenants. D. The term "person" when used to describe a partner means an individual, a corporation, a trust, an estate, or another partnership. Clear my choice

C. Co-ownership of property that is maintained and leased or rented is considered a partnership if the co-owners provide no services to the tenants. Under Reg. 301.7701-1(a), mere co-ownership, maintenance, repair, and rental of property does not constitute a partnership. The co-owners are partners only if, in addition to renting the property, they provide additional services to the occupants and share the profits.

Contributions of non-cash property will never be taxable when contributed to which type of entity? A. General partnership B. S corporation C. Sole proprietorship D. C corporation

C. Sole proprietorship Forming an entity is normally a tax-free endeavor. Starting a proprietorship never has any tax consequences. However, contributing noncash assets to a corporation, a partnership, or a limited liability company may lead to a taxable transaction. The owner recognizes earned income for contributed services and may recognize a taxable gain if (1) noncash assets are encumbered by debt or (2) appreciated assets are contributed and a distribution is taken soon thereafter. Under certain circumstances, contributions of noncash property to a C corporation may be treated as a sale of the assets to the corporation.

Sunshine LLC is formed in the current year with six members. Which of the following is a false statement about Sunshine's possible tax status under the check-the-box regulations? A. Sunshine does not have to make a special election to be taxed as a partnership. B. If Sunshine elects to be taxed as a C corporation, the LLC is treated as having undergone a corporate formation transaction. C. Sunshine must wait 2 years after an election is filed before it can be taxed as a C corporation. D. The election must be signed by every member of Sunshine or by any officer, manager, or member of Sunshine who is authorized to make the election.

C. Sunshine must wait 2 years after an election is filed before it can be taxed as a C corporation. An eligible entity may elect its classification on Form 8832. If no election is made, the default classification for an eligible entity with two or more members is a partnership. If the LLC does not wish to be taxed as a partnership, every member of the entity, or an officer, manager, or member of the LLC who is authorized to make the election, must sign an election to be taxed as an association taxed as a corporation. If an entity makes an election to change its classification, the taxpayer must specify the effective date of the election. The effective date cannot be more than 75 days before or 12 months after the date the election was filed. Therefore, Sunshine LLC does not have to wait 2 years before it will be taxed as a C corporation. When Sunshine elects to be taxed as a C corporation, it is treated as having undergone a corporate formation transaction that is generally tax-free under Sec. 351.

Which of the following is a characteristic of a sole proprietorship but not a general partnership without a majority partner? A. Equity capital may not be raised by selling shares of stock in the business. B. The business's profits and losses are passed through to the owner(s). C. The death of one owner causes the termination of the business. D. Profits are subject to self-employment taxes.

C. The death of one owner causes the termination of the business. In a sole proprietorship, the death of the proprietor causes the automatic termination of the business. However, the death of a general partner results in dissociation, not the termination of the partnership.

EJH Partnership was organized in the current year with three partners, E, J, and H. The three individuals elected to use the default classification when filing the entity's federal income tax return. The partnership wants to change its tax classification from being a partnership to being an association taxed as a C corporation. How long after changing to C corporation status must the EJH Partnership wait before it can make another change in classification by election? A. The change in election can be made at any time. B. 12 months. C. 24 moths. D. 60 months.

D. 60 months. If an entity makes an election to change its classification, it cannot reelect its classification by election during the 60 months following the effective date of the election. The taxpayer must specify the effective date of the election. The effective date cannot be more than 75 days before or 12 months after the date the election was filed.

Most unincorporated businesses formed after 1996 can choose whether to be taxed as a partnership or a corporation. The regulations provide for a default rule if no election is made. If an election is not made and the default rules apply, which of the following is true? A. Any new domestic eligible entity having at least two or more members is classified as a partnership. B. Any new domestic eligible entity with a single member is disregarded as an entity separate from its owner. C. If all members of a new foreign entity have limited liability, the entity is classified as an association. D. All of the answers are correct.

D. All of the answers are correct. Under a "check-the-box" system, certain business entities are automatically treated ascorporations for federal tax purposes, while others may elect to be treated as corporations for federal tax purposes. If an entity has one owner and is not automatically considered a corporation, it may nevertheless elect to be treated as a corporation or, by default, it will be treated as a sole proprietorship. Similarly, if an entity has two or more owners and is not automatically considered a corporation, it can elect to be taxed as a corporation for federal tax purposes; otherwise, it will be taxed as a partnership. Further, if all members of a new foreign entity have limited liability, the entity is classified as a corporation. One type of a corporation as defined in the Internal Revenue Code is an association.

A major characteristic of the corporation is its status as a separate legal entity. As such, it may withstand attempts to "pierce the corporate veil." The corporation that is least likely to withstand such attempts successfully is one that A. Was formed for tax savings. B. Was formed to insulate its owners from personal liability in a valid business arrangement. C. Is a wholly owned subsidiary. D. Hold assets only to defraud creditors.

D. Hold assets only to defraud creditors. A corporation is a separate legal entity that may be organized and used for a variety of purposes. The corporate form may be disregarded, however, if it is used in a manner contrary to public policy, e.g., to defraud creditors.

All of the following are available tax classifications for a single-member entity under the check-the box regulations except A. Association taxed as a C corporation. B. Sole proprietorship. C. Association taxed as an S corporation D. Limited liability company.

D. Limited liability company. For a single-member entity formed after the institution of the check-the-box regulations, the default classification is for the entity to be disregarded as a separate entity from the taxpayer (i.e., a sole proprietorship). However, an election can be made by the entity to be treated as an association taxed as a corporation. Electing to be treated as an association, the entity is able to choose to be taxed as either an S corporation or a C corporation. To be an S corporation, it must make an S election plus the election under the check-the-box regulations to be treated as an association. A limited liability company is an entity for legal purposes, but is not recognized as a distinct tax classification.

Which of the following is a false statement about the taxation of a limited liability company (LLC)? A. Members may elect to be taxed as partners. B. Members may elect to be taxed as a corporation. C. It may be advantageous for an LLC to be taxed as a corporation. D. Single-member LLCs must be taxed as corporations.

D. Single-member LLCs must be taxed as corporations. Members may elect to be taxed as partners, and single-member LLCs may be taxed as sole proprietorships. Furthermore, taxation as a corporation is an option and may be advantageous is reinvestment in the LLC is desired and corporate rates are lower than personal rates.

An advantage of a limited liability company (LLC) is A. Informal organization procedures. B. Unlimited liability only for members that actively participate in management. C. Each member's receipt of an equal share of profits. D. The ability to be taxed as a pass-through entity while have limited liability.

D. The ability to be taxed as a pass-through entity while have limited liability. An LLC may elect to be taxed as if it were a general partnership while have limited liability.

Which of the following statements best describes the effect of the assignment of an interest in a general partnership? A. The assignee becomes a partner, even if other partners object. B. The assignee is responsible for a proportionate share of past and future partnership debts. C. The assignment automatically dissolves the partnership. D. The assignment transfers the assignor's interest in partnership profits and losses and the right to distributions.

D. The assignment transfers the assignor's interest in partnership profits and losses and the right to distributions. A partner's transferable interest in the partnership consists of the partner's share of profits and losses and the right to distributions. it may be assigned without the dissolution of the partnership. The assignee does not automatically become a partner and would not have the right to participate in managing the business or to inspect the books and records of the partnership.

Which one of the following is least important when reviewing the partnership agreement for income tax purposes? A. Income and expense allocation. B. Modifications of the agreement. C. Economic effect of allocations to partners. D. The form of the agreement.

D. The form of the agreement. For income tax purposes, there are no formal requirements regarding the partnership agreement. A partnership agreement or modifications thereof may be oral or written [Reg. 1.761-1(c)].

Which of the following acts is more likely to cause a court to pierce the corporate veil? A. Failure to designate a registered agent in the articles of incorporation (Charter). B. Retention of excess capital. C. Failure to conduct a significant portion of business in the chartering state. D. Using corporate assets for the owner's personal purposes.

D. Using corporate assets for the owner's personal purposes. Typically, the corporate veil is pierced when a court finds that the corporation is merely the alter ego of a shareholder, for example, when (1) it is undercapitalized, (2) the assets of the corporation and the shareholders are commingled, (3) corporate formalities are ignored, or (4) the corporation is established for a sham purpose.

Limited partners are able to be active in the management of the limited partnership. (t/f)

False- A limited partners is an investor who makes a contribution of cash or other property to the partnership in exchange for an interest in the partnership. A limited partners is not active in management of the partnership.

A major advantage of a sole proprietorship is that it can easily raise equity capital other than the personal resources of the proprietor. (t/f)

False- A major weakness of a sole proprietorship is that it cannot raise equity capital other than the personal resources of the proprietor.

Losses and deductions are passed through for sole proprietorship, partnerships, and C corporations to the owners.

False- Losses and deductions are passed through for sole proprietorships, partnerships, and S corporations (not C corporations) to the owners. However, the loses and deductions are limited to the owner's basis in the entity, the owner's at-risk basis, and the passive activity loss rules.

The proprietor and the proprietorship are distinct legal entities. (t/f)

False- The proprietor and the proprietorship are not distinct entities, so the income/loss of the business is reported by the proprietor.

Which of the following statement is (are) usually true regarding general partners' liability? I All general partners are jointly and severally liable for partnership torts. II All general partners are liable only for those partnership obligations they actually authorized.

I only Partners are jointly and severally liable for the torts committed by another who acts within the ordinary course of the partnership business or with the authorization of the other partners. Joint and several liability means that all of the partners are liable, but a third party my hold any partner liable for the entire amount. Because a general partner is an agent of the business, he or she has apparent authority to bind the partnership to contracts with third parties formed while carrying on the partnership business in the usual way.

Although transferability of ownership is easier for a corporation than for other forms of organization, selling the stock of a small business may still be difficult.

True - Theoretically, transferability of ownership is easier for a corporation than for other forms. In reality, the following two factors make the transfer of the stock of a mall business difficult: • There is usually little market for stock of a closely held corporation, • Shareholders generally are more interested in limiting transferability than in promoting it.

For federal tax purposes, certain business entities formed after 1996 are automatically classified as corporations. Other business entities with at least two members can choose to be classified as either an association taxable as a corporation or a partnership. A business entity with a single member can choose either to be classified as an association taxable as a corporation or to be disregarded as an entity separate from its owner. (t/f)

True - Under a "check-the-box" system, certain business entities are automatically treated as corporations for federal tax purposes, while others may elect to be treated as corporations for federal tax purposes. If an entity has one owner and is not automatically considered a corporation, it may nevertheless elect to be treated as a corporation or, by default, it will be treated as a sole proprietorship. Similarly, if an entity has two or more owners and is not automatically considered a corporation, it can elect to be taxed as a corporation for federal tax purposes; otherwise, it will be taxed as a partnership.

A general partner may not also be a limited partners in the same partnership. (t/f)

True- A general partner may not also be a limited partners in the same partnership.

Personal liability protection may be a client's primary objective.

True- Personal liability protection may be a client's primary objective. Operating as a proprietorship or general partnership offers no liability limitation to its owners/partners. Limited partnerships, limited liability companies, limited liability partnerships, S corporations, and C corporations may provide the partners/stockholders with liability protection depending on certain factors.

When parties intend to create a partnership, they must agree to: Conduct a business for profit Manage in a full-time capacity

Yes and No A partnership is an association of two or more persons conducting a business, which they co-own for profit. Thus, partners must objectively intend that their business make a profit, even if not profit is earned. Each of the parties must be a co-owner, i.e., they share profits and losses of the venture and management authority (unless they agree otherwise).